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Friday, 26 April 2013

NBN: Why Telstra shareholders would be silly to accept a "rent not buy" deal

This is a more technical treatment of why I think Telstra shareholders would be unwise to accept any deal to rent the last-mile copper, not accept a variation of the same one-off payment deal they have now.

The Coalition NBN plan is based on significantly lower CapEx, they need to rent the copper, not buy it.The minimum commercially viable service period for a DSL-node network is far too uncertain.

Because the GPON Fibre Networks starts with a 28% share of the market, is a more desirable product and its inherent Operational and Maintenance costs are lower, it is far too easy for the 12% change in market share needed to hit a "tipping point" of 40%of the market will be met, and met quickly.

The network assets, nodes and copper, have around a 20-year depreciation schedule. A reasonable line-rental agreement would be expected to be around that.

Think back to 1997, around 20 years ago, and compare the Internet then and now. By the time the Coalition deal is returning money, we can guarantee devices, content, speeds, services and operator margins will be completely different. Any reasonable forecast of Internet changes over 10-20 years must include significant change. "The Internet Changes Everything, including itself."

Not just even in an economic downturn scenario, but especially then, because everyone will be looking for cheaper ways to do everything: the Internet is the ultimate product-substitute and market disruptor. An economic downturn will radically increase demand for Internet services, just as sales of cosmetics boom in downturns, at the expense of the usual luxury goods.

Fibre starts off as a more desirable consumer service because it's faster, more reliable and upgradeable.It is intrinsically cheaper to maintain and GPON can be upgraded in-field, possibly even by the client. Want a 10Gbps service? "I'll just mail that new card to you... That'll be $100. Charge or Credit?"

Even when a huge price barrier of $3-$5,000 for conversion is artificially introduced by the Coalition plan, consumer desire will be very strong. With current consumer technologies, it's mindlessly simple and under $200/premise to share a single expensive connection. One household pays for the Fibre upgrade and 2 or more piggyback off their connection. A 10m cat-6 cable is really cheap, a WiFi router, well you might already have one of those on a shelf collecting dust.

We know from experiences like "chipping" games consoles and "all region" conversions of DVD players that consumers will blow-past artificial restrictions for desirable goods and services, especially those they find are high-utility.

The effective price barrier is closer to $1,000, maybe as low as $350, if specialist businesses form around "sharing Fibre".

At $3,000 to convert a premise to Fibre, a DSL-NBN may take 10 years to reach the tipping point.At $1,000 to access a shared Fibre, a DSL-NBN doesn't have a 5 year life.At $350 to access shared Fibre there is no price barrier to leaving DSL-NBN.

Remember the fall of the Berlin Wall and the subsequent collapse of the USSR: when a "tipping point" is reached, the rest of the change happens with blinding and, to some, startling speed.

That's the question for Telstra shareholders to consider:

Can DSL-NBN maintain sufficient market share for even 5 years to make "rent not buy" at least as good as their current deal?

That same question should be keeping the Coalition NBN team up at nights.